Weekly Market Update

06/11/2017

US President Donald Trump named Jerome Powell as his nominee to replace Janet Yellen as head of the Federal Reserve when her term ends in February. Powell, a Republican former lawyer, and private equity executive, has served as a member of the US central bank’s board since 2012.

Powell is expected to continue the Fed’s policy of gradually raising interest rates and is widely regarded as a source of continuity.

The US Federal Reserve kept interest rates steady and gave upbeat comments about the economy. The Fed signalled solid US economic growth and a strengthening labour market while downplaying the impact of recent hurricanes, a sign it is on track to lift borrowing costs again next month.

Developments at the Fed come as corporate earnings are coming in generally above expectations for the third quarter.

Some initial details emerged regarding President Trump’s tax bill, with the proposed corporate tax rate being reduced from 35 per cent to 20 per cent, while a 12 per cent charge on offshore cash piles. If successful, it would cut the corporate rate from one of the highest levels in the developed world.

The President has pinned his hopes on the tax reform as their best chance to retain Republican control of Congress next year amid the instability of the Trump presidency. The bill itself faces strong opposition but will likely gain traction in 2018.

The Bank of England increased interest rates for the first time in a decade, raising its benchmark by a quarter of a percentage point to 0.5 per cent and signalling the start of a gradual increase in borrowing costs. However, this was a dovish hike and we could be in a one and done scenario rather than in a hiking cycle.

The Bank itself sees the medium-term outlook for the economy as weak because productivity growth is low, there is limited scope to increase employment rates and Brexit is likely to reduce prosperity further. Sterling fell on the news providing little encouragement in the decision.

Oil companies delivered strong quarterly results, with Royal Dutch Shell announcing a better-than-expected 47 per cent increase in third-quarter profits. This followed strong results from BP, who reported a doubling in third quarter profits from $933 million last year to $1.87 billion.

BP has now managed to pay off most of its liabilities related to the 2010 Deepwater Horizon explosion and the resultant oil spill in the Gulf of Mexico.

Apple’s quarterly numbers beat expectations, with strong revenue and profits as well as rosy forecasts for the holiday season. This resulted in shares hitting a new all-time high. The iPhone X, its latest device, was released on Friday. Apple needs it to be a hit as the iPhone generated 63 per cent of group revenues last year.

 

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